Ai Editorial: 4 key considerations for stepping up average order value

First Published on 13th July, 2017

Ai Editorial: Stepping up the average order value or targeting incremental revenue per passenger has been identified as one area for airlines to improve upon their financial performance.  

 

Revenue from optional services, such as onboard sales of food and beverages, checked baggage, premium seat assignments, and early boarding benefits, hovered around the $45 billion-mark last year, according to IdeaWorksCompany. But if on one hand, a group of carriers led by Ryanair can garner as much as 25% in ancillary revenue as a percentage of operating revenue, the “traditional” category has a fair bit to catch on.  

Ai’s Ritesh Gupta spoke to Joacim Berntsson, Strategic Business Development Manager - Airline Market, Paxport about the gaps that are impeding the average order value, dealing with the current distribution and technology status quo etc. Areas that need to be focused upon:

1.     Why apt blend of content, data and technology isn’t enough?: For Berntsson, in order to make more money per passenger, airlines need to put more pieces of a puzzle and these are - choice, content, reach, pricing, flexibility, time-to-market, data, relevance and timing.

Explaining his viewpoint, he said consumers are ready to pay, especially the “Millennials”, and this category can’t be ignored. According to Boston Consulting Group, every third person in the world is a millennial. Berntsson said, “In five years, they will be the core customer group of airlines, the Millennials are very likely to pay extra for both flight- and non-flight related services. They are spoiled with choice and have a strong wish to pick and choose from a la carte menus. So the foundation is there, consumers are ready to pay and airlines have started to unbundle their product – actually, the most profitable airlines in the world are the ones where the biggest share of the revenues comes from ancillary services, and they are mainly low cost carriers. So one might ask oneself, why don’t we see a higher growth with more “traditional” airlines?”

Berntsson further explained that a major reason could be the comparison of the shopping experience that passengers have with airlines vis-à-vis retailers, such as Amazon. “Airlines have a hard time replicating these experiences. People want choice, full descriptions of what they buy, pictures, recommendations etc. One of the main issues is that the distribution systems used in the industry where built 30-40 years ago, and they were built for fares distribution through travel agencies – not merchandising. So in real airlines only reach one third of their customers with their full service offering as the rest buys their fares through travel resellers.” He adds, “And the offering is quite limited, with a wider choice you might achieve somewhat of personalisation without big data, it’s as simple as the more I can chose from the more likely it is that I find something I like – but today’s systems don’t support it. That of course have an effect on average order value but it also a question of pricing, or should we say the optimal pricing for an optimal conversion on sales.”

Referring to the significance of value, he said, “People are prepared to pay, but only for value – to me, charging $15 for a standard seat on a one and a half hour flight isn’t apt, they are not converting me – I can’t see the value. And I think many others feel the same way, just as an example – having a 30% conversion on $8 seats gives 60% more revenue than 10% on $15. So it is not only about technology, it’s also about having merchandising smartness and the possibility to follow up on sales and being able to correct the pricing instantly!”

“It is also a question about relevance and timing, when am I prepared to buy what – it is not until a few days before I travel that I start thinking about if I need a parking slot or need a transfer.”

As for data, Berntsson also referred to the need to look beyond big data and bank on small data as well. This is an issue at large with other suppliers, too. For instance, hotel companies are recommended to overcome analytical limitations of individual “silos” of market and channel segment data and rather improve upon their demand segmentation and also net contribution of each segment. Citing an example, Berntsson mentioned, “If I travel from Stockholm to Rhodes it is possible to be more predictive that will convert more – it is possible to pre-package a parking or transfer offer in relation to my flight times, it is likely I need a transfer in Rhodes around the time I arrive? The airline know what aircraft I am on so proposing me seats and meals should be easy, also post-booking – when it is likely I am prepared to share more of my wallet, but very few do.”

2.     Be open to change: Airlines tends to be operationally, process and cost-focused, and at large aren’t savvy enough to embrace the requisite organizational change needed to become a retailer. As highlighted in one of our recent articles, airlines can start small, in a smart way and capitalize on opportunities. For instance, Paxport referred to the “pre-order” service in Scandinavia. “Airlines experience a  ‎€70 average order buying, very often with a 15% conversion. Customers can choose their duty-free in advance. Technology isn’t an issue rather the drive or willingness to do it is the biggest hurdle. Look for right KPIs and return on investment with whatever is being done.  Airlines should look at the 15% conversion rate rather than worrying about .5% fulfillment error!

3.     Changing the status quo: Berntsson points out that airlines are quite stuck in their internal - sometimes operational processes, with risk management and that’s understandable. “But there are ways to work around that, but you will need to look at the whole picture – if I change my distribution how will that work with my current payment and settlement set-up? It’s about daring to invite a new 3rd party company to help, will that increase the cost base of the airline? Not necessarily – there is “new money” to share with those companies, and in my opinion that money is the only way to break up an old business model that is costing the airlines a lot of money. But for a period of time it will have to be a mix of old technology/ business model and new technology/ business model, if you can manage the transition smart enough you will come out at the other end of the tunnel a much “happier” airline.”

The number of airlines opting to alter their respective commercial strategies have only been few till date.

4.     Evaluate connectivity for differentiated content and offers: Airlines can refine their API connectivity and are trying to work on an exclusive basis or in a tailored manner for their offerings with intermediaries. For instance, flight offers and bundled ancillaries for certain routes for a specific agency or a tour operator. Changes are being made in the merchandising engine, rules are being defined, content is being delivered etc. So this doesn’t involve any traditional means of distribution.

Also, when we talk of distribution of content via an API, airlines need to be wary of the initiative. NDC is essentially defining the model and workflow of the airline creating and delivering the offer. The very nature of the NDC initiative is to create a robust schema that enables any airline to create and deliver its offers to any distribution channel or third party entity.  As we highlighted in this article, there are airlines which have implemented NDC APIs, but have no real strategy on how to improve their distribution-related KPIs. Just implementing some NDC APIs will not drive revenue, nor improve customer service.  

Berntsson agrees and says NDC will not make airlines better retailers, but it will make it easier from a technological stand point. NDC and One Order are fine, but “it is about a lot of different things; to become merchandisers, to know your customers better etc. – some are getting there slowly but surely,” he says. 

As for a challenge with NDC, while deploying an NDC API between airline and intermediaries there have been evolving versions of the schema. This meant the likes of meta-search engines have had to improvise their implementation for different airlines. Doesn’t this increase complexity around a standard that is supposed to be uniform? Yes, it does,” said Berntsson, “Not only that, but even if being a standard from a communication perspective, doing the same calls etc., the offer of the airlines, their product structure, business rules, ancillaries can all differ from airline to airline making it more complex. One way of getting around that would be to use a 3rd party technology provider handling versions and differences between airlines.”

So be it for what, when and how to offer to a passenger, drifting away from the status quo, embracing change as an organization or making the most of NDC standard, airlines need to be swift to step up the average order value.

 

Hear from senior travel industry executives about digitization, differentiation and NDC at the upcoming The Mega Event Asia-Pacific 2017 - 4th Annual Profitabilty Summit, to be held at the Grand Mercure Roxy Hotel in Singapore (23-25 August, 2017).

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